Fixed rate bonds are savings accounts that pay a set interest rate for a fixed term, typically one to five years, in return for locking your money away. In September 2026 the average advertised rate on a one-year fixed rate bond was 4.35%, against 2.06% on easy access accounts and a Bank Rate of 3.75%, according to Bank of England data. Deposits are protected by the FSCS up to £120,000 per person, per banking licence. Interest outside an ISA is taxable above your personal savings allowance, at higher rates from 6 April 2027 after Budget 2026.
How fixed rate bonds work
A fixed rate bond is a deposit with a bank, building society or credit union. Despite the name, it is not a bond in the investment sense: it is not traded, its value does not move with markets, and you get back the amount you paid in plus interest. You agree a term, such as one, two, three or five years, and the provider agrees a rate for the whole of it.
The basic trade is certainty in exchange for access. You know exactly what the account will pay, even if Bank Rate and other savings rates fall during the term. In return, you usually cannot withdraw or add money until the bond matures.
- Deposit: most accounts take a single lump sum at the start, often within a short funding window after opening.
- Term: fixed from the start date to a stated maturity date.
- Rate: fixed for the term and quoted as an annual rate, usually alongside the AER, which shows the return as if interest were paid and compounded once a year.
- Interest: paid monthly, annually or at maturity, depending on the account. Some providers let you choose.
- Maturity: the provider contacts you before the end date. If you do nothing, the money may move into another account, often at a lower variable rate, so check the terms.
Monthly or annual interest, and the AER
Accounts that pay interest monthly usually quote a slightly lower gross rate than the same account paying annually, because monthly payments arrive sooner. The AER puts both on the same footing. For illustration only: a gross rate of about 4.31% paid monthly and compounded gives the same AER of 4.40% as a 4.40% rate paid once a year.
Monthly interest is often chosen by savers who want a regular income from their cash, often paid to a separate current account. If the interest is paid away rather than added to the bond, it does not compound, and the return over the term is the gross rate rather than the AER. The AER is the standard basis for comparing accounts, and the account terms say where interest will be paid.
Early access rules and what they cost
Early access is the main difference between fixed rate bonds and easy access savings. Terms vary by provider and are set out in each account’s conditions. Broadly, accounts fall into two groups.
- No early access: the money is locked until the maturity date.
- Early access with a penalty: you can close the account or withdraw before maturity, but you lose an amount of interest set out in the terms.
Some penalties can exceed the interest earned so far, which would mean getting back less than you paid in; the account terms say whether that can happen. The closure terms are fixed when the account is opened, so they matter before money goes in, not only when it is needed. The access terms also affect tax, because HMRC treats interest differently depending on whether you can draw on it, as the tax section below explains.
Some people split savings into an easy access account for emergencies and fixed rate bonds with different maturity dates, sometimes called a ladder. That spreads the dates on which money becomes available and the dates on which rates are reset.
Where fixed rate bonds sit against Bank Rate
The Bank of England publishes monthly averages of advertised savings rates. Since February 2019 these cover the whole market of UK banks and building societies, using advertised rates collected by Moneyfacts and weighted by business volumes; fixed rate bond rates assume a £5,000 balance with interest paid annually (Bank of England). They are averages, so individual accounts pay more or less.
| Account type | Average quoted rate, September 2026 | Bank of England series |
|---|---|---|
| Easy access (instant access, including bonuses) | 2.06% | IUMB6VJ |
| One-year fixed rate bond | 4.35% | IUMWTFA |
| Two-year fixed rate bond | 4.50% | IUMB6RH |
| Three-year fixed rate bond | 4.56% | IUMB6RI |
| Two-year fixed rate cash ISA | 4.53% | IUMZID2 |
| Bank Rate (monthly average) | 3.75% | IUMABEDR |
Source: Bank of England Database, monthly averages for September 2026, downloaded 1 November 2026.
The Bank of England held Bank Rate at 3.75% on 17 September 2026, with six members voting to hold and three for a rise to 4% (Bank of England). Its next decision is due on 5 November 2026 (Bank of England).
Why fixed rates can move when Bank Rate does not
Fixed rate bonds are priced on where savers and banks expect rates to be over the term, not only on Bank Rate today. The Bank of England’s series show the average one-year fixed rate bond falling from 4.30% in September 2024 to 3.51% in March 2026, then rising to 4.35% by September 2026. Bank Rate was 3.75% in every month from January to September 2026. By September, three of the nine committee members were voting for a rise, and gilt yields had climbed: the 10-year nominal par yield averaged 5.24% in September 2026 (Bank of England Database, IUMAMNPY).
Longer fixes do not always pay much more. In September 2026 the gap between one-year and three-year fixed rate bonds was 0.21 percentage points. A saver weighing a longer term is weighing that small extra rate against the risk of being locked in if rates rise further.
What savers actually earn
Advertised rates are not the same as what households receive on all their deposits. The Bank of England’s effective interest rate data, published on 29 October 2026, show an average of 4.42% on new time deposits by households in September 2026, 3.44% on all outstanding time deposits and 1.66% on sight deposits such as current and easy access accounts (Bank of England). Older fixed deals and low-rate variable accounts pull the averages down.
FSCS protection on fixed rate bonds
Money in UK-authorised banks, building societies and credit unions is protected by the Financial Services Compensation Scheme. The deposit limit rose to £120,000 per eligible person, per authorised firm, on 1 December 2025; between 1 January 2017 and 30 November 2025 it was £85,000 (FSCS). The limit covers all your deposits with the same firm added together, including fixed rate bonds, easy access accounts and cash ISAs.
The detail that matters most is the banking licence. Separate brands that share one licence count as one bank, so the £120,000 applies to the combined total. You can check whether brands share a licence on the Financial Services Register (FSCS).
- Joint accounts: protected up to the same £120,000 per eligible person, so each holder’s share counts towards their own limit.
- Payout: the FSCS says it pays compensation within seven working days of a bank, building society or credit union failing; complex cases take longer.
- Temporary high balances: up to £1.4 million is protected for up to six months where it arises from life events such as selling a home or receiving an inheritance.
A hypothetical example, for illustration only: you hold £70,000 in a fixed rate bond with one brand and £60,000 in an easy access account with another brand that shares the same licence. Your total with that firm is £130,000, so £10,000 is above the FSCS limit. Interest added to the accounts also counts towards the total.
How interest on fixed rate bonds is taxed
Interest on fixed rate bonds held outside an ISA is savings income. It is paid without tax deducted and counts against your personal savings allowance: £1,000 for basic rate taxpayers, £500 for higher rate taxpayers and nothing for additional rate taxpayers, in 2026 to 2027 and 2027 to 2028 (HMRC, OOTLAR Annex A). People with other income below £17,570 may also use the starting rate for savings, which covers up to £5,000 more at 0% (GOV.UK).
Budget 2026: higher savings rates from 6 April 2027
Interest above the allowances is taxed at 20%, 40% or 45% in 2026 to 2027. Budget 2026 set the rates for 2027 to 2028 at 24%, 44% and 49%, across the whole UK, two points higher than the 22%, 42% and 47% legislated after Budget 2025 (HMRC, 29 October 2026). For anyone with a multi-year fixed rate bond, the rate that applies depends on which tax year the interest falls in.
When the interest counts
HMRC’s manual says interest arises when it is received or made available to you, which includes being credited to an account you are free to draw on (HMRC, SAIM2440). It gives the example of a five-year bond that credits interest each year and allows early access with a penalty. Because the terms let the saver draw on the funds, the interest is taxable each year as it is credited.
If the terms of the bond did not allow access until maturity, HMRC says the interest would arise, and be taxed, at that point. A long fixed rate bond with no early access that pays all its interest at the end can therefore put several years of interest into a single tax year.
| Illustration only: £20,000 two-year bond at 4.50%, basic rate taxpayer with no other interest | Interest paid annually | All interest paid at maturity, no early access |
|---|---|---|
| Interest in year 1 | £900 | £0 |
| Interest in year 2 (maturity) | £900 | £1,840.50 (compounded) |
| Personal savings allowance used | £900 each year | £1,000 in the maturity year |
| Taxable interest | £0 | £840.50 |
| Tax if maturity falls in 2027 to 2028 (24%) | £0 | £201.72 |
The example ignores any other savings income and assumes the saver stays a basic rate taxpayer; interest counts towards total income, so a large maturity payment can also change your band. For a higher rate taxpayer receiving £900 a year, £400 would be taxable after the £500 allowance: £160 at 40% in 2026 to 2027, or £176 at 44% in 2027 to 2028. Our cash savings desk covers the allowances in more depth.
Banks report interest to HMRC after the tax year ends, and HMRC usually collects any tax through your tax code or a Simple Assessment letter; if you receive more than £10,000 of interest, you must file Self Assessment (GOV.UK).
Fixed-rate cash ISAs
A fixed-rate cash ISA works like a fixed rate bond, but the interest is tax-free. GOV.UK says you do not pay tax on interest on cash in an ISA (GOV.UK). The adult ISA subscription limit is £20,000 for 2026 to 2027 and 2027 to 2028, shared across all types of ISA (OOTLAR Annex A).
Budget 2026 reversed a planned cut to the cash ISA limit. The government will keep the cash ISA limit at £20,000 for all savers aged over 18 from April 2027, through secondary legislation to be laid before Parliament in November 2026 (HMRC, OOTLAR item 2.5). Articles written before 28 October 2026 that describe a £12,000 cash ISA cap for under-65s are out of date.
In September 2026 the average two-year fixed-rate cash ISA was 4.53%, compared with 4.50% on a two-year fixed rate bond (Bank of England Database). The after-tax comparison depends on your band.
For illustration only: a higher rate taxpayer who has already used the personal savings allowance keeps 2.70% of a 4.50% taxable rate at 40%, and 2.52% at 44% from April 2027. A basic rate taxpayer whose interest stays within the £1,000 allowance pays no tax either way. Early access rules on fixed-rate cash ISAs also vary, and ISA transfer terms are set by each provider.
A worked example: a three-rung savings ladder
A ladder splits one sum across several fixed terms so that part of it matures each year. The example below is hypothetical and for illustration only. It uses the Bank of England’s September 2026 average rates, assumes interest is paid annually and that the saver is a basic rate taxpayer with no other savings interest.
| Rung | Deposit | Rate (BoE average, September 2026) | Interest a year | Matures |
|---|---|---|---|---|
| One-year bond | £10,000 | 4.35% | £435 | After year 1 |
| Two-year bond | £10,000 | 4.50% | £450 | After year 2 |
| Three-year bond | £10,000 | 4.56% | £456 | After year 3 |
| Total | £30,000 | 4.47% average | £1,341 | One rung a year |
The £1,341 of interest exceeds the £1,000 personal savings allowance by £341. That excess would cost £68.20 at 20% in 2026 to 2027, or £81.84 at 24% in 2027 to 2028. The same £30,000 in a single easy access account at the 2.06% average would earn about £618 a year, inside the allowance, but at a variable rate.
When each rung matures, the money can be spent, moved to easy access or fixed again for three years at whatever rate is then on offer. Nobody knows those future rates, which is the main uncertainty in a ladder. The structure trades a slightly lower average rate than fixing everything for three years in exchange for a share of the money becoming available every year.
Fixed rate bonds compared with easy access savings and gilts
A fixed term deposit is one of several ways to earn a known return on cash. The main alternatives work differently on access, price risk, protection and tax.
| Feature | Easy access savings | Fixed rate bonds | Gilts held to maturity |
|---|---|---|---|
| Rate | Variable; can change at any time | Fixed for the term | Fixed coupon; return set by price paid |
| Access | Usually any time | Usually none, or with a penalty | Can be sold any trading day at the market price |
| Price risk | None | None if held to maturity | Price moves daily; known return only if held to maturity |
| Protection | FSCS up to £120,000 per licence | FSCS up to £120,000 per licence | Issued by the UK government; not an FSCS deposit |
| Tax outside a wrapper | Interest is savings income | Interest is savings income | Coupons are savings income; gains free of capital gains tax |
A gain on the disposal of gilt-edged securities “shall not be a chargeable gain” under section 115 of the Taxation of Chargeable Gains Act 1992. That is why the after-tax return on a gilt bought below £100 can differ from a fixed rate bond with the same gross yield. Our guides on how to buy gilts and gilts or a fixed-rate savings account by tax band work through the numbers.
Risks and drawbacks of fixed rate bonds
A fixed deposit removes market risk, but it does not remove all risk.
- Inflation: CPI inflation was 3.1% in August 2026, above the 2% target, according to the Bank of England (Bank of England). After tax, a fixed rate can fall below inflation, so the money buys less at maturity. See inflation, cash and index-linked gilts.
- Rate risk: if rates rise after you fix, you are locked in at the lower rate unless you pay a penalty to leave.
- Access risk: money needed before maturity may be unavailable, or available only at a cost.
- Provider risk above the limit: balances above £120,000 per person per licence are not protected by the FSCS.
- Maturity drift: money left in a default account at maturity may earn a much lower variable rate.
- Tax timing: interest paid at maturity can land in one tax year, use the whole allowance and be taxed at the higher 2027 to 2028 rates.
Before you open a fixed rate bond: what to check
- How much money could stay locked away for the whole term, and how much may be needed at short notice.
- Read the early access and closure terms, including how any penalty is calculated.
- Check how and when interest is paid, and whether that puts interest into one tax year.
- Work out how much interest you already receive against your personal savings allowance.
- Check whether a fixed-rate cash ISA would make the interest tax-free, and how much ISA allowance you have left.
- Confirm the provider’s banking licence and your total with that firm against the £120,000 FSCS limit.
- Note the maturity date and what happens to the money if you do nothing.
In short, fixed rate bonds pay a known rate for a known term, which in September 2026 averaged 4.35% for one year and 4.56% for three years against 3.75% Bank Rate. They are protected by the FSCS up to £120,000 per person per licence. From 6 April 2027 taxable interest above the allowances costs more, so the account type, the interest dates and the wrapper you use all affect what you keep.
